Corporate taxes hurt more than just the companies that are on the receiving end of them. Rather than absorb the expense all themselves, business leaders spread the financial obligations to other parties. It’s how they survive. Shareholders certainly take a hit, but so does the average citizen.
Some studies have determined that consumers could bear 50 percent or even close to 65 percent of the corporate tax through higher prices on goods and services. Businesses will often pass portions of the extra expense on to the products they sell.
At a time when many are struggling to afford necessities like food and housing, it’s a cost they can’t sustain.
While inflation has slowed from recent highs, consumers are still feeling its impact. The inflation rate for food is similar to the overall inflation rate at just under 3 percent. Additionally, the rate for shelter is well above the average at over 4 percent.
These increased costs might suggest that lawmakers should turn to businesses to support their budgets. However, they should be warned that doing so won’t spare consumers.
Individuals will not only be hurt through higher prices, but also lower wages
A 2018 study analyzed state corporate taxes and found that neighboring counties separated by state borders have different job and income levels. Counties in states with higher corporate tax rates have less employment and lower wage income. According to their estimates, a one percentage point corporate tax increase leads to a 0.2 percent fall in employment in the affected county and total wage income falling by about 0.3 percent. The reverse is true for tax cuts.
Before the historic Tax Cut and Jobs Act of 2017 was passed, which reduced the federal corporate tax rate from 21 percent to 15 percent, the average hourly earnings for non-supervisory workers were growing at an annual rate of 2.4 percent. After the tax cuts, wage growth for these workers increased to 3.7 percent by October 2019. By April 2020, the average worker was earning about $1,400 more per year than the previous trend would have predicted.
A worker’s wages have direct effects on the consumer market. More take home pay allows greater flexibility and capacity to buy necessary items. Diminished wages reduce purchasing power, forcing households to tighten budgets and potentially forego certain products or services.
Lower wages in addition to higher prices—on account of increased corporate taxes—is a double whammy, hitting consumers twice: First through a smaller income, and second through more expensive commodities.
Raising corporate tax rates hurts low-income households the hardest due to having less discretionary funds. By reducing their wages in addition to increasing consumer prices, they struggle the most to make ends meet, afford necessities like food and housing. The best way to help these communities is to keep corporate tax rates low.
The prevailing assumption that corporate taxes are borne by a company’s owners is held by too many policymakers who underestimate the impact these taxes have on the average person. The unintended consequences of duties levied by governments hurt the very people legislators claim to be helping.
It is best to keep corporate tax rates low for the sake of the working consumer.
Kristen Walker is a policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, follow us on Twitter @ConsumerPal.